FOREIGN DIRECT INVESTMENT

India has already marked its presence as one of the fastest growing economies of the world. It has been ranked among the top 10 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly.

The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. FDI policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment in the country.

Foreign investment up to 49% in defence sector permitted under automatic route. The foreign investment in access of 49% has been allowed on case to case basis with Government approval in cases resulting in access to modern technology in the country or for other reasons to be recorded

FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959

FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks, Mobile TV, Headend-in- the Sky Broadcasting Service

FDI up to 100% under automatic route permitted in Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels

In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products, sourcing norms can be relaxed up to three years and sourcing regime can be relaxed for another 5 years subject to Government approval

Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services increased from 74% to 100% under the automatic route

FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval

Foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and nonscheduled airtransport services up to the limit of 49% of their paid up capital

In order to provide clarity to the e-commerce sector, the Government has issued guidelines for foreign investment in the sector. 100% FDI under automatic route permitted in the marketplace model of e-commerce

100% FDI under Government route for retail trading, including through e-commerce, has been permitted in respect of food products manufactured and/or produced in India

For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted

Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture has been waived off

TYPES OF INVESTORS

Individual:

FVCI (Foreign Venture Capital Investors)

Pension/Provident Fund

Financial Institutions

Company:

Foreign Trust

Sovereign Wealth Funds

NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)

Foreign Institutional Investors:

Private Equity Funds

Partnership / Proprietorship Firm

Others

GLOSSARY OF DEFINITIONS

Automatic Route:

Under this route no Central Government permission is required.

Government Route:

Under this route applications are considered by the Foreign Investment Promotion Board (FIPB). Approval from Cabinet Committee on Security is required for more than 49% FDI in defence. The proposals involving investments of more than USD 769.23 million are considered by Cabinet committee on economic affairs.

The Indian company receiving FDI either under the automatic route or the government route is required to comply with provisions of the FDI policy including reporting the FDI and issue of shares to the Reserve Bank of India. The details can be seen from Q.6 of Section I of the following link- Quarter 6 of Section I.

* Relevant Para of Consolidated FDI Policy, June 2016 ** Proposals involving FDI beyond 49% in sensitive areas from security point of view, to be brought by the Ministry of Railways before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.

ENTRY STRUCTURES

Incorporating a company in India:

It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private limited company requires minimum of 2 shareholders.

Limited liability partnerships:

Allowed under the Government route in sectors which has 100% FDI allowed under the automatic route and without any conditions.

Sole proprietorship/partnership firm:

Under RBI approval. RBI decides the application in consultation with Government of India.

Extension of foreign entity:

Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions.

Other structures:

Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).

STEPS INVOLVED IN INVESTMENT

Identification of structure

Central Government approval if required

Setting up or incorporating the structure

Inflow of funds via eligible instruments and following pricing guidelines

Meeting reporting requirements of RBI and respective Act

Registrations/obtaining key documents like PAN etc.

Project approval at State/UT level

Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.

Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some of the industries may also require industrial license.

Construction/renovation of unit.

Hiring of manpower.

Obtaining licenses if any.

Other state & central level registrations.

Meeting annual requirements of a structure, paying taxes etc.

REPATRIATION

Repatriation of Dividend:

Dividends are freely repatriable without any restrictions (net after tax deduction at source or Dividend Distribution Tax.

Repatriation of Capital:

Authorized Dealer(AD) Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

Investments are subject to lock-in period of 3 years in case of construction development sector.

Repatriation of Interest:

Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes).

ASPECTS OF TAXATION

Direct Taxes:

The investor is required to pay tax on net income earned in India. The rates of taxes differ among structures.

Company:

The company incorporated in India is required to pay 30% tax+surcharge+education cess on net income earned. It is also required to deduct tax on profits distributed @15.5%+surcharge+education cess.

The fixed place of business in India is treated as a permanent establishment and is required to pay tax @40%+surcharge+education cess. There is no tax on profits distributed.

Limited Liability Partnerships (LLPs):

LLPs are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.

Minimum Alternate Tax (MAT):

18.5%+SC+EC- Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 18.5% of their book profits. However MAT credit (MAT-actual tax) can be carried forward in next 10 years for set-off against regular tax payable during the subsequent years subject to certain conditions.

State Government Incentives:

Each state government has its own incentive policy, which offers various types of incentives based on the amount of investments, project location, employment generation, etc. The incentives differ from state to state and are generally laid down in each state’s industrial policy.

The broad categories of state incentives include: stamp duty exemption for land acquisition, refund or exemption of value added tax, exemption from payment of electricity duty etc.